Assoc. Prof. Dr. Asyraf Wajdi DusukiHead, Research Affairs

AANZFTA BUSINESS SEMINAR: Partners In Growth: Services Trade with Southeast Asia

Amora Hotel, Wellington; Friday 3 June 2011

The Framework of Islamic FinanceThe Framework of Islamic Finance66

Showcase of Malaysian Islamic Financial Showcase of Malaysian Islamic Financial CentreCentre55

Global Outlook of Islamic FinanceGlobal Outlook of Islamic Finance

The Impact Financial Crisis to Islamic FinanceThe Impact Financial Crisis to Islamic Finance33

Salient Features of Islamic FinanceSalient Features of Islamic Finance44

Characteristics of Islamic FinanceCharacteristics of Islamic Finance77

Growth of Islamic Financial AssetsGrowth of Islamic Financial Assets22

AANAFTABusiness Seminar

ConclusionConclusion88

Shariah-Compliant Operation

1st Level of Compliant

2nd Level of

Compliant

Nominate Contracts

Non-Nominate Contracts

Investment Activities

Rectifying & Purifying

Conversion Process

Hedging Instruments

Monitoring & SupervisionSocial Responsibility

Maqasid al-Shariah(The Objectives of Shariah)

The Framework of Islamic Finance

EN

DS

ة /غايال

M

EAN

S/ة يلسلو ا

Asset Classes in Islamic Finance

Free from Gambling

Free fromGharar (Ambiquity)

Entitlement toEqual, Adequate,

Accurate Info.

Free fromDharar (Detrimental)

Free from Riba (Usury)

Promote Public Interest

(Maslahah)

Free fromPrice control &

Manipulation

Freedom to Contract

Entitlement toTransaction at

Fair Price

Characteristics of Shariah-compliant Banking and

Financial System

Promote Equity

A system grounded on moral and

ethics

Illustration on Sukuk

Structuring

Technical Meaning Sukuk refers to securities,

notes, papers or certificates, with features of liquidity and tradability

(except for salam and murabahah sukuk)

Literal MeaningSukuk is the plural of sak which means certificates.

Other similar terms:•Taskik – process of dividing assets into

papers (sukuk)•Tawriq – to render something into cash

SUKUK

AAOIFI“Investment sukuk are certificates of equal value representing undivided

shares in ownership of tangible assets, usufructs and services (in the ownership

of) the assets of particular projects or special investment activity”

Malaysian Securities Commision“A document or certificate which represents the value of an asset”

• Asset – may include financial asset such as receivables and debts, as well

as non financial assets like tangible assets, usufructs and services.

Income Generating ProjectSukuk Investors

Obligor/Project Developer Issuer/Trustee

Sukuk Issue Proceeds

Proceeds fromSukuk Sales

Income from project

BASIC STRUCTURE OF SUKUK

Comparing SUKUK to BONDSSukuk Bonds

1. Holder owns assets 1. Holder owns cash flow only

2. Use a variety of contracts to create financial obligations between issuer and investors; e.g. Sale, lease, equity partnership, joint-venture etc.

2. Simply use a loan contract to create indebtedness

3. Return linked to profit elements in-built in the sale, lease or partnership

3. Return linked to interest charged out of the loan contract

4. Instrument may be equity or debt depending on underlying contract

4. It is a Debt instrument

5. Tradability of the sukuk depends on the nature of the underlying asset

5. No restriction on the tradability

6. Investment in Shari`ah-compliant activities

6. Proceeds are invested in any business without restrictions

Pakistan

Hong Kong Aims to become Islamic

finance gateway to China Plans to issue sovereign sukuk Hang Seng Islamic China Index

Fund in 2007

UK Gov’t sets an objective to ‘entrench

London as a global gateway for Islamic finance

5 FSA-approved Islamic banks and Takaful operators

Plans to issue sovereign sukuk, amend tax law on IF

UAE

Japan

Law passed allowing banks to do Islamic financeFrance

Passed rules/regulations to support Islamic finance activities

In process of licensing Islamic banks

Made fiscal & legal adjustment for IF transaction i.e. taxation guidelines on sukuk & murabaha

Singapore Established first Islamic bank Introduced tax neutrality for Islamic finance Aspiring to be centre for Islamic finance Launched Islamic ETF

South Korea

Parliament expected to pass the law related to offering of tax waiver on foreign investors’ interest income from sukuk issued

Thailand

Qatar

Sudan

Indonesia

Kuwait

Germany Saxony-Anhalt state issued

government sukuk First Islamic bank to operate

in 2010

Emerging interest on Islamic finance as viable alternative to the global financial system …

Saudi Arabia

Bahrain

Malta Plans to position

as Islamic finance hub for the Mediterranean

Jordan Plans to tap sukuk market to

finance its deficit

Turkey Announced IFC Istanbul in Sep ’09

with focus includes interest-free financial business

Brunei

Aim to become Islamic financial services hub for Asia

Muslim-majority countries offering Islamic finance (IF)

Non-muslim countries starting to offer IFCourtesy of Bank Negara

Malaysia

Malaysia

Iran

Starting in 1971 with the first Islamic bank in Egypt, there are now more than 600 Islamic financial

institutions in 75 countries

11

Global developments – Islamic banking

Growth expected to continue

Global growth rate of 15-20% per annum over the last 10 yearsMid 1990s – approximately USD150b2009 – approximately USD780b2010 – estimated USD956b2012 – USD1.6t (IFSB estimate)

By 2020, estimated to reach USD4tAlmost 90% of global market share are in

top 6 Islamic financial markets

Courtesy of Bank Negara Malaysia

12

Global sukuk market

Continued to expand in 2009

Courtesy of Bank Negara Malaysia

13

Global developmentsBreakdown of Islamic finance assets

The largest share of Islamic financial assets remains in Islamic banking, although growth is slowingSukuk and takaful continues to grow Islamic funds registers a slight decrease

Courtesy of Bank Negara Malaysia

14

Post crisis sukuk market

Impact of global financial crisisNot spared as sukuk is seen in the same asset class as bonds…

but has since staged a recovery –•USD20b in 2008

•USD33b in 2009 (▲70%)

•USD50b (▲ 55%) in 2010

USD34b

Courtesy of Bank Negara Malaysia

15

Post crisis global Islamic banking industry

Largely shielded

Only 1 Islamic financial institution required government assistance 5 top conventional banks received government assistance of USD163.0b or

26% of their combined equity

Not a single Islamic bank required to be rescued

Source: IFSB-IRTI-IDB Islamic Finance and Global Financial Stability Report,

6 April 2010 based on E&Y study

2008

2009

Study on Top 10 Conventional banks vs Top 10 Islamic banks

Between Dec 2006- May 2009 Conventional Islamic

Combined market capitalisation 42.8% 8.5%

Net profitsDeclined from

USD116b to USD42b loss

Increased by 9% from USD4.2b to

USD4.6b

Total assets growth 36% (USD17.4t) 55% (USD147b)

Total equity growth 24% 36%

Leverage ratio (Assets/equity)

From 16.6x to18.2x

From 5.8x to 6.6x

Courtesy of Bank Negara Malaysia

Global Islamic banking industry

Largely shielded: reasons whySurrounding factors

• Market deregulation followed by unprecedented levels of leverage, relaxed lending standards

• Rapid issuance of mortgage-backed securities

• Tremendous growth of CDS market

• Growth of complex securities and derivatives

│16

US Commercial Papers Outstanding

Courtesy of Bank Negara Malaysia

• Greater transparency & disclosure-

additional Shariah governance

unique risks• Greater fiduciary duties &

accountability• Emphasis on clear documentation

& contract add to soundness & stability

│17

Real Activities Ethical

Governance

Global Islamic finance industry

Largely shielded: reasons why

• Direct link to real economy• Certainty – supported by

underlying activities (prohibition of gharar - uncertainty)

• Prohibits excessive leveraging• Money is not commodity

• Avoidance of unethical activities

• Avoidance of maisir (gambling) & riba (interest) & non-permissible goods & services

• Screening investment• Forbearance for customers in

difficulties

• Different contractual relationship

• Equity-based & risk-sharing transactions

• Clearly defined risk & profit-sharing characteristics serve as additional built-in mechanisms

Courtesy of Bank Negara Malaysia

Context settingContext setting The Malaysian The Malaysian Financial LandscapeFinancial Landscape

│18

• Legal & Regulatory– Islamic Banking Act – Takaful Act – Government

Funding Act – Capital Market

Services Act

• Shariah Advisory Council

– Central Banking Act

• Dispute Resolution– Judicial system:

dedicated high court

– KL Regional Centre for Arbitration

– Financial Mediation Bureau

• Banking– 17 Islamic banks– 10 Islamic windows– 3 International Islamic Banks– 14 International Currency

Business Units (ICBU)

Takaful– 8 takaful operators– 4 retakaful operators– 7 ICBUs

• Fund Management– 9 Islamic fund managers– 35 Islamic fund management

windows– Legal firm– Accounting– Financial Intermediaries – Financial Advisors– Consultancy Service

– Payment, clearing and settlement, custodian

– Principal Dealers– Listing on Bursa with

authorise exchange status

Professional Service

Diversified PlayersGovernance

Infrastructure

Financial Markets

– Capital Market– Money Market– Foreign Exchange Market– Commodity Market– Bursa Suq Al-Sila

More than 30 years of experiences in developing Islamic finance…

Malaysia: the world’s most comprehensive Islamic financial system…

IslamicBanks & Takaful

Companies

IslamicCapital Market

IslamicMoney Market

Money market

Conventional Banks & Insurance

Companies

Capital market

Malaysian Financial

SystemLabuan IBFC

Courtesy of Bank Negara Malaysia

• 58% of outstanding corporate bond are sukuk

• Malaysia’s outstanding sukuk (public & private) = USD66 billion @ end June 2009

– 62% of total outstanding sukuk globally

• Malaysia as centre for innovative sukuk

• Active secondary sukuk market

Source: Malaysian ICM Bulletin, June09, SC

Malaysia has a well-developed sukuk market

• More than 80% of the sukuk are private sectors’ sukuk

Courtesy of Bank Negara Malaysia

ISRA @ INCEIF2nd Floor, Annexe BlockMenara Tun RazakJalan Raja Laut50350 Kuala LumpurMALAYSIAGeneral Line : +603-2781 4000Fax : +603-2691 1940

Email : asyraf@isra.my Website : www.isra.my